Results

1HFY14 core PATAMI, grew by 11% to RM335.6m (14.66 sen/share), making up 51.5% and 49.0% of ours and consensus estimates respectively.

Deviations

Largely in line.

Dividends

None. Dividends usually declared in 1Q and 3Q. Highlights The water debacle dominated yesterday’s briefing. Below are the salient points.

Water hazard… Management has expressed deep concerns over the development of the Selangor water restructuring exercise and do not discount the possibility of Section 114 of the WSIA Act being invoked to takeover SPLASH (40% stake). There has been many conflicting statement by both Federal and State Government with many contradicting legal issues.

Big loss… If SPLASH is indeed nationalised, Gamuda will see a loss in earnings contribution of ~RM100m and see our SOP valuation slashed by 41 sen/share. A decision by the cabinet is expected to occur sometime next week.

Go for MRT… On a positive note, the cabinet has approved Line 2 of the KVMRT project. We expect Gamuda-MMC JV to be the frontrunner for Line 2 as well which is expected to cost RM25bn (RM10bn underground portion; RM15bn elevated works). Works for Line 2 is expected to start in early 2016.

Property…. Achieved lower new property sales of RM405m in 2Q (1Q: RM575m) as the property sector cools down especially in Iskandar. 1HFY14 new property sales of RM980m have achieved 51.6% of RM1.9bn FY14 sales target. Overall, unbilled property sales remained unchanged at RM1.7bn.

Foreign shareholding… As of end Feb, foreign shareholding stood at 38%, down from 41% in Nov-13.

Risks

Execution risk; Failure in securing new projects; Political and regulatory risk; Rising raw material prices; Unexpected downturn in the construction and property cycle; Sharp depreciation of the VND.

Forecasts

Unchanged.

Rating

HOLD 

We believe that the uncertainty revolving the Selangor water restructuring exercise will dampen Gamuda’s share price. Although positives will come from the next line of the KVMRT project, profit contribution from it will only sustain earnings instead of delivering earnings growth.

Given that there is less than 10% total upside from our TP, we are maintaining our HOLD call on the company.

Valuation

Maintain TP of RM4.62 based on SOP valuation (see Figure #3).

Source: Hong Leong Investment Bank Research - 28 Mar 2014